ADVANCED FINANCIAL ACCOUNTING AND REPORTING d. P166,250.

00

Definition of a Partnership Problem 2

A partnership is “a contract whereby two or more Jason and Kidd have just formed a partnership Jason
persons bind themselves to contribute money, property, contributed cash of P920,000 and office equipment that
or industry to a common fund, with the intention of costs P422,000. The equipment had been used in his sole
dividing the profits among themselves.” Two or more proprietorship and had been 70% depreciated. The
persons may also form a partnership for the exercise of current value of the equipment is P295 000 Jason also
a profession. Article 1767, Civil Code of the Philippines. contributed a note payable of P87 000 to be assumed by
the partnership The partners agreed on a profit and loss
VALUATION:
ratio of 50% each Jason is to have a 70% interest in the
1. Cash Face Value partnership Kidd contributed only a merchandise
2. Inventory Lower of Cost and Net Realizable Value inventory from her sole proprietorship carried at
3. Non-current Assets P550,000 on a first in first out basis. The current fair value
of the merchandise is P525,000. To consummate the
a. Agreed Value b. Fair Value c. Appraised Value formation of the partnership Jason should make
d. Carrying Value/Book Value additional investment or (withdrawal) of:
4. Liabilities considered assumed by the partnership if A. P224,000 C. P97,000
the problem is silent
B. P(30,000) D. P(80,000)
5. Capital
Problem 3
5.1. Bonus Method
Green admits Lantern as a partner in business. Accounts
5.2. Exact Method in the ledger of Green on June 1, 2018, just before the
Bonus Method: Under this method, the new partner’s admission of Lantern, show the following balances:
investment may or may not equal the book value of the Cash P26,000
capital interest that has been purchased If it exceeds the
book value of the capital interest, then the difference, Accounts Payable P264,000
which is referred to as a bonus, will be distributed to the
Accounts Receivable 120,000
old partners If the investment made by the new partner
is less than the book value of the capital interest that has Green, Capital 62,000
been purchased, then the bonus will be allocated to that
Merchandise Inventory 180,000
new partner.
It is agreed that for purposes of establishing Green’s
Exact Method: Under this method, the investment made
interest, the following adjustments should be made
by the new partner equals the book value of the capital
interest that they have purchased. • An allowance for doubtful accounts of 2% of accounts
receivable is to be established
Partnership goodwill is no longer recognized under IFRS
• The merchandise inventory is to be valued at P202,000.
Problem 1
• Prepaid expenses of P6,500 and accrued expenses of
On December 1, 2019, AA and BB formed a partnership
P4,000 are to be establishes Lantern is to invest sufficient
with contributing the following assets at fair market
funds in order to receive a 1/3 interest in the
values
partnership.
AA BB
1. How much is the adjusted capital of Green?
Cash P9,000 P18,000
2. How much cash should Lantern invest?
Machinery and equipment 13,500 -
3. How much is the total assets of the partnership?
Land - 90,000
Problem 4
Building - 27,000
On July 1 2019 XX and YY decided to form a partnership
Office Furniture 13,500 - The firm is to take over business assets and assume
liabilities, and capitals are to be based on net assets
The land and building are subject to a mortgage loan of
transferred after the following adjustments
P 54 000 that the partnership will assume. The
partnership agreement provides that AA and BB share a) XX and YY’s inventory is to be valid at P31,000 and
profits and losses, 40% and 60% respectively and P22,000, respectively.
partners agreed to bring their capital balances in
b) Accounts receivable of P2,000 in XX’s book and P1,000
proportion to the profit and loss ratio and using the
in YY’s books are uncollectible.
capital balance of BB as the basis The additional cash
investment made by AA should be: c) Accrued salaries of P4,000 for XX and P5,000 for YY are
still to be recognized in the books.
a. P18,000.00 c. P134,000.00 b. P85,500.00
d) Unused office supplies of XX amounted to P5,000, 7. The capital balances of XX and YY in the combined
while that of YY amounted to P1,500. balance sheet:

e) Unrecorded patent of P7,000 and prepaid rent of a. XX, P81,250; YY, P72,000
P4,500 is to be recognized in the books of XX and YY,
b. XX, P81,250; YY, P75,000
respectively.
c. XX, P100,000; YY, P75,000
f) XX is to invest or withdrew cash necessary to have a
40% interest in the firm. d. XX, P 62,000; YY, P93,000
Balance sheets for XX and YY on July 1 before Problem 5
adjustments are given below:
A, B and C formed the ABC Partnership on July 1, 2018,
with the following assets, measured at book values in
their respective records, contributed by each partner:

Determine:

1. The net adjustments – capital in the books of XX and

YY:
Problem 6
a. XX, P7,000 net debit; YY, P2,000 net credit
CC and DD are joining their separate business to form a
b. XX, P5,000 net debit; YY, P7,000 net credit partnership. Cash and non-cash assets are to be
contributed for a total capital of P150,000. The non-cash
c. XX, P7,000 net credit; YY, P2,000 net debit
assets to be contributed and liabilities to be assumed
d. XX, P5,000 net credit; YY, P7,000 net debit are:

2. The adjusted capital of XX and YY in their respective Determine:

books.

a. XX – P65,000; YY – P102,000

b. XX – P63,000; YY – P107,000

c. XX – P77,000; YY – P98,000
1. The total assets of the partnership.
d. XX – P77,000; YY – P93,000
a. P159,375.00 b. P150,000.00
3. The additional investment (withdrawal) made by XX:
c. P140,625.00 d. P112,500.00
a. P(15,000.00)
2. The amount of cash that each partner must contribute:
b. P(6,666.50)
a. CC – P37,500; DD – P9,375
c. P3,000.00
b. CC – P37,500; DD – P5,625
d. P8,377.50
c. CC – P80,625; DD – P78,750
4. The total assets of the partnership after formation:
d. CC – P63,750; DD – P5,625
a. P235,333.50 c. P220,333.50
Problem 7
b. P230,000.00 d.P212,000.00
The Peter and Wendy Partnership was formed on
5. The total liabilities of the partnership after formation: January 2, 2019. Under the partnership agreement, each
partner has an equal initial capital balance. Partnership
a. P57,000.00 c. P54,000.00
net income or loss is allocated 60% to Peter and 40% to
b. P48,000.00 d. P51,000.00 Wendy. To form the partnership, Peter originally
contributed assets costing P30,000 with a fair value of
6. The total capital of the partnership after formation: P60,000 on January 2, 2019, and Wendy contributed
a. P180,000.00 c. P163,333.50 P20,000 cash. Drawings by the partners during 2019
totaled P3, 000 by Peter an P9,000 by Wendy. The
b. P178,333.50 d. P155,000.00 partnership net income in 2019 was P25,000. Under the
bonus method, what is Wendy’s initial capital balance in
the partnership?
A. 20,000 B. 25,000 a) Original capital – the initial investment/capital
at the time of formation
C. 40,000 D. 60,000
b) Beginning capital of the period
Problem 8
c) Ending capital of the period
Selected balance sheet accounts of Silvano on December
31, 2019 are shown below: d) Average capital

CashP30,000 d1) Simple average

Accounts receivable 25,000 d2) Weighted average

Inventory 45,000 4) Interest on partners’ capital accounts and dividing the

balance on agreed ratio
Furniture 32,000
5) Salaries to partners and dividing the balance on agreed
Accounts payable 8,000
ratio
The following adjustments are to be made before he
6) Bonus to partners and dividing the balance on agreed
agrees to admit Pegasus as a partner in exchange for his
ratio
investment of P20,000 cash: 3% bad debts should be
provided. The fair value of the furniture is P27,000. 7) Interest on capital account balance, salaries and bonus
P5,000 of the inventory is obsolete but can still be sold to partners and dividing the balance on agreed ratio.
for P3,000.
Because of its simplicity, the equally or the arbitrary ratio
1. After adjustment, how much capital should be approach is the most
reflected in the books of Silvano?
common of allocating profit or loss. It is simple because
a. P115,250 b. P116,250 it ignores capital

c. P124,000 d. P132,250 balances. Assigning profit based equally or on an

arbitrary ratio may be simple,
2. How much is the total assets of the new partnership?
but this approach is not necessarily equitable to all
a. P116,250 b. P124,000
partners. No single ratio is
c. P124,250 d. P144,250
likely to reflect properly the various contributions made
ADVANCED FINANCIAL ACCOUNTING AND REPORTING by a partner. Indeed, an

Partnership Operations unlimited number of alternative allocation plans could

be devised in hope of
The Partnership Law provides that if the profit allocation
has been agreed upon, the share of each partner in the achieving fair treatment for all parties.
losses shall be in the same proportion with the net
Details about profit and loss allocation methods
income allocation. It also provides that on the absence of
agreement, the share of each partner in the profits and 1) Equally – this method may be proper when the capital
losses shall be in proportion to what they have or service contribution of the
contributed (based on capital contributions), but the
partners are considered to be the same.
industrial partner shall receive such share as may be just
and equitable under the circumstances. However, the 2) Arbitrary ratio – this method may be employed to
law is not clear as to what capital balances shall be recognize the difference in capital
applied, whether the capital balances refer to original
capital, beginning or end of each period or the average and service contribution of the partners.
capital during the period. In as much as the law does not 3) Capital balances – this method is not only easy to apply
clearly specify the capital balance, it is therefore, but can also prevent certain
presumed to be the original capital. In the absence of
such original capital, it should be the beginning inequities from occurring among partners if the
capital.Methods of profit and loss allocation partnership is liquidated.

Profit and loss can be shared in many ways among 4) Original capital– the reason behind the usage of
partners of a partnership. original capital is that, if at the time

Most profit and loss sharing formula includes one or of formation there is no agreement, the law should
more of the following apply, and the only available capital

features or techniques: balance is the original capital

1) Equally
2) Arbitrary ratio
3) In the ratio of partner’s capital account balances and
dividing the balance on agreed ratio:
Problem 1 a. Interest at 4% is allowed on average capital
investments, and the balance is divided equally.
Kenny, a senior partner in a law firm, has a 30%
participation in the firm’s profit and b. A salary of P24,000 is to be credited to Nuggets, 4%
interest is allowed on each partner on their ending
losses. During 2018, Kenny withdrew P130,000 against
capital balance, and the balance in the ratio of beginning
her capital but contributed
capital balances.
property with a fair value of P25,000. Kenny’s capital
c. Salaries allowed to Denver and Nuggets in the amounts
increased by P15,000 during
of P34,000 and P38,000. respectively, and remaining
2018. profits and losses are divided in the ratio of average
capital balances.
The net income of the partnership for 2018 is
d. A bonus of 10% of partnership net income is credited
A. P150,000 to Denver, a salary of P16,000 is allowed to Nuggets, and
C. P.350,000 remaining profits and losses are shared equally. (The
bonus is regarded as an expense for purposes of
B. P400,000 calculating the bonus amount).
D. P550,000 Problem 4
Problem 2 X, Y and Z, agree to form a partnership and to share
JJ and MJ are partners operating a chain of retail stores. profits in the ratio 5:3:2. they also agreed that Z is to be
The partnership agreement provides for the following: allowed a salary of P140,000 and that Y is to be
guaranteed P105,000 as his share of the profits. During
the first year of operations, reported net income was
P420,000. How much of the profits should be credited to
X, Y, and Z?

Problem 5

XX and YY formed a partnership on January 2, 2019 and

agreed to share profits and loss in the ratio of 90% and
The income summary account for year 2019 shows a 10%, respectively. XX contributed capital of P6,250. YY
credit balance of P25,500 before any deductions. contributed no capital but has a specialized expertise and
Average capital balances for JJ and MJ are P25,000 and manages the firm full time. There were no withdrawals
P37,500, respectively. The share of JJ and MJ in the during the year. The partnership agreement provides for
P25,500 net income would be: the following:

a. JJ, P12,031.25; MJ, P13,468.75 • Capital accounts are to be credited annually with
interest at 5% of the beginning capital
b. JJ, P13,275.75; MJ, P12,229.25
• YY is to be paid a salary of P250 a month
c. JJ, P11,750; MJ, P13,750
• YY is to receive a bonus of 20% of net income calculated
d. JJ, P13,125; MJ, P12,375 before deducting his salary and interest on both capital
Problem 3 accounts

Denver and Nuggets organized a partnership on January • Bonus, interest, and YY’s salary are to be considered as
1, 2018. The following entries were made in their capital partnership expenses. The partnership’s income
accounts during 2018: statement for 2019 follows:

Revenues………………………………………P24,112.50

Less: Expenses (including salary, interest, and

bonus)…………………………………………....12,425.00

Net Income……………………………………..11,687.50

1. What is YY’s 2019 bonus?

a. P2,922.00 c. P3,750.00

b. P3,000.00 d. P3,934.50
If the partnership net income, computed before salaries,
interest and bonus is 2. How much is the total share of YY on the 2019
partnership net income?
P56,000 for 2018, indicate its division between the
partners under each of the a. P7,084.50 c. P7,918.75

following independent profit-sharing agreements: b. P7,162.50 d. P8,097.00

Problem 6 1. In the reported net income of P25,000 for the year
2018, Garry would have
The DEFG Company, a partnership, was formed on
January 1, 2019, with four partners, DD, EE, FF, and GG. A. P21,900 C. P17,100
Capital contributions were as follows: DD, P25,000; EE,
B. P0 D. P12,500
P12,500; FF, P12,500; GG, P10,000. The partnership
agreement provides that partners shall receive 5% Problem 9
interest in the amounts of their capital contributions. In
addition, DD is to receive a salary of P2,500 and EE a Alpha, Beta and Charlie invest P40,000, P30,000 and
salary of P1,500. The agreement further provides that FF P25,000 respectively, in a partnership on June 30, 2017.
shall receive a minimum of P1,250 per annum from the They agree to divide net income or loss as follows:
partnership and GG a minimum of P3,000 per annum, A. Interest at 10% on beginning capital account balances
both including amounts allowed as interest on capital
and their respective shares of profits. The balance of the B. Salaries of P10,000, P8,000 and P6,000, respectively to
profits is to be shared in the following proportions: DD, Alpha, Beta and Charlie, respectively.
30%; EE, 30%; FF, 20%; and GG, 20%. Calculate the C. Remaining net income or loss is divided equally
amount that must be earned by the partnership during
2019, before any charges for interest on capital or D. A minimum of P18,000 of income is guaranteed to
partners’ salaries, in order that DD may receive an Charlie regardless of the result of operations.
aggregate of P6,250 including interest, salaries and share
If the net income for the year ended June 30, 2018 before
of profits.
interest and salaries allowances to partners was P44,000,
a. P 8,333.33 c. P15,333.33 the amount of the net income credited to

b. P 15,000.00 d. P16,166.67 Alpha is:

Problem 7 A. P21,875 C. P18,334

A partnership was formed on January 1, 2018, with four B. P20,000 D. P14,500

partners, C, P, A and S. Capital contributions were as
Problem 10
follows: C- P1,000,000; P-P500,000; A- P500,000; and S-
P400,000. the partnership agreement provides that each Partners Pepsi and Sarsi share profits 3:1 after annual
partner shall receive 5%interest on the amount of his salary allowances of P4,000 and P6,000 respectively;
capital contribution. In addition, C is to receive a salary however, if profits are not adequate to meet the salary
of P100,000 and P a salary of P60,000 which are to be allowances, the entire profit is to be divided in the salary
charged as expenses of the business. The agreement ratio. Profits of P9,000 were reported for the year 2017.
provides that A shall receive a minimum of P50,000 per in 2018, it is ascertained that in calculating net income
annum from the partnership and S a minimum of for the year ended December 31, 2017, depreciation was
P120,000 per annum, both including amounts allowed as overstated by P3,600 and the ending inventory was
interest on capital and their respective shares of profits. understated by P800. The amount of the net adjustments
The balance of the profits to be shared in the following in the books of Pepsi and Sarsi are:
proportions: C- 30%; P- 30% A- 20% and S-20%. Calculate
Pepsi Sarsi
the amount that must be earned by the partnership
during 2018, before any charge for interest on capital or A P(3,699) P(1,813)
partners ‘salaries, in order that C may receive an
aggregate of P250,000, including interest, salary and B P2,950 P1,450
share of profits. C P8,188 P8,563
Problem 8 D P2,300 P3,475
Garry and Lising created a partnership to own and
operate a health-food store. The partnership agreement
provided that Garry receives an annual salary of P10,000
and Lising a salary of P5,000 to recognize their relative
time spent in operating the store. Remaining profits and
losses were divided 60:40 to Garry and Lising,
respectively. Income of P13,000 for 2017, the first year
of operations, was allocated P8,800 to Garry and P4,200
to Lising. On January 1, 2018, the partnership agreement
was changed to reflect the fact that Lising could no
longer devote any time to the store’s operations. The
new agreement allows Garry a salary of P18,000, and the
remaining profits and losses are divided equally. In 2018,
an error was discovered such that 2017 reported income
was understated by P4,000. The partnership income of
P25,000 for 2018 included this P4,000 related to 2017.